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USD, Economy And Policy
- During the summer of 2014, the US dollar had a good risk vs. reward proposition as it prepared to rally.
- Today, amidst initial economic pressures on manufacturing and exports, the over bought USD is a far different story from a risk vs. reward standpoint.
- If economic flattening continues the FOMC may introduce language at one of its meetings that could be adversarial to the strong currency.
- After all, interest rate increases are usually meant to support a currency saddled by overt inflation issues. That is not USD currently.
Employment, The Economy And Interest Rates
- On the surface the February Employment report was very good.
- But the economy is now 'servicing' itself as manufacturing continues to decelerate and export activity weakens.
- This is right in line with our expectations of the strong dollar's eventual effects.
- The market is in 'when, not if' mode with respect to interest rates.
- That may or may not be the case and the last chart below argues that distortions built in to markets will yield unpredictable outcomes.
Gold: Value, Re-Propositioned
- For years we have maintained that a sound orientation towards gold is one of value, not price.
- Gold is not a return instrument, it is insurance against the 'risk' side of the 'return' equation.
- Confusing the two concepts has gotten many people into trouble with gold, as evidenced by the bear market's perceptions, which are opposite those of the previous bull.
The Financialized Economy
- Manufacturing was an early economic leader as ISM began to firm in 2013.
- Recent ISM and other manufacturing data have shown some back sliding, in line with our expectations, due to persistent strength in the USD.
- But turning the vast services economy is like turning a battleship; i.e. there could be a significant lag between a manufacturing downturn and a general economic downturn.
Fed Rate Hikes And The Stock Market
- It doesn't matter when the Fed raises interest rates.
- ...until it DOES matter.
- 'Quant' analysis cannot account for the policy distortions introduced post-2008.
Economy: The Canary Is Alive And Well
Tue, Jan. 27 • 1 Comment
- Exactly two years ago, we used gathering strength in the Semiconductor Equipment industry to gain a heads up on coming US economic strength.
- Today, that Canary is still chirping, per the most recent Book-to-Bill ratio (b2b) for December.
- We do however wonder if there is a year-end correlation between Semi equipment and high-end machine tools, which you can almost set your watch by each December.
- The machine tool phenomenon is not economy related. The Semi b2b had been down trending but is on a year-end bump. Upcoming data will be critical to the economy.
Bottom-Line Thoughts On The Gold Sector
- A long-term phase of global economic contraction remains intact.
- Gold mining is counter-cyclical, which finally gives the sector a positive risk-vs.-reward proposition against the broad U.S. stock market.
- Volatility will ensue, understand the dynamics in play. The bottom line below gives some thoughts and perspective.
Welcome, Baby 2015
- Monetary policy in 2011 changed macro trends.
- 2015 appears to have potential for a culmination of those trends as QE fades and policy pressure mounts.
- The highest confidence prediction during the New Year's traditional cavalcade of forecasts? 'Baby 2015' is going to be very different from 'Old Man 2014'.
Deflation Or Inflation?
- 6 years ago the current inflationary operation was initiated.
- There are many similarities between today's building deflationary pressures and those that manifested in 2008.
- But the dynamics have changed in that inflation has gone global, and so too has the deflationary response. It has also slowed way down compared to the 2008 event.
Economy Post-Jobs Report: Real Or Memorex?
Dec. 10, 2014 • 1 Comment
- We had extrapolated coming economic strength two years ago, based on a strengthening canary in a coal mine: the semiconductor equipment sector's rising book-to-bill (b2b) ratio.
- The progression was semis (b2b) --> manufacturing (ISM) --> general economy and jobs.
- Going forward, the same indicators will guide us - perhaps before long, in a different direction - as the U.S. economy has been built on increasing debt.
- The difference is that the current cycle is fueled by government debt as opposed to the commercial credit bubble that fueled the previous up cycle.
Semiconductor Equipment Book-To-Bill Ratio Moderating
- In January of 2013 we used the ramp up in the semi capital equipment sector as a gauge for coming strength in US manufacturing, "jobs" and the economy.
- Our informal "channel checks" since have remained firm.
- A negative Book-to-Bill ratio would have negative economic implications (in line with our view that a strong USD would eventually wear away at US manufacturing and exports.
- A bear market in gold is still in force from 2011.
- Monetary policy, while unsustainable and promoting inequity, is working for now.
- Goldzilla will rise up one day to tear it all down.
- But you need to be patient and intact when the time comes for macro change.
Gold Bug Psychology Must Be Neutered
- A bounce is likely amid over-bearish sentiment.
- Though the case for gold as insurance against a leveraged out of control system has never been better, market realities dictate the interim phases.
- The active phase since gold's previous bull market ended in 2011 has been risk 'ON' amid a speculative atmosphere promoted by global policy making.
- Gold will, as they say, have its time. But please check your bias and assumptions at the door in the interim.
A Simple View Of Gold
- The monthly technicals are bearish.
- 'Indian Wedding Season' and 'China Demand' are the products of lazy analysis and are not reasons to be bullish on gold.
- Gold will turn when confidence in policy making turns (our best guess is at the 1000 +/- support shelf that marked the bottom in confidence in 2008).
- In the meantime, a bounce in the gold sector is possible.
Currencies And Gold: The Big Picture
- USD and Yen would likely rise in a liquidity crisis.
- Swiss Franc and Indian Rupee have been the best currencies for the longer term.
- Commodity currencies (Canada and Aussie) are bearish.
- Gold, which provides no function other than monetary value retention, bides its time.
U.S. Stock Market Update
- Option 1: Market takes a correction in July to relieve over bought, over loved status. This is potentially a healthy pause to refresh before new highs.
- Option 2: Market channel bursts upward and momentum fuels an upside blow off that would be terminal to the bull, a la 'Silver 2011'.
- We lean toward Option 1 for now.
Gold's Value Is Not About Currency Collapse
- Gold vs. commodities (i.e. gold's "real" price) is in a major secular bull market.
- Gold has been kicked to the curb amid major confidence in policy making and resultant asset market increases.
- Only when confidence in policy and the targeted asset bubbles deflate will the best case for gold come to the fore.
- The US dollar would initially benefit if asset markets were to liquidate.
ZIRP Gains More Attention
- Mainstream economist highlights what we have been saying for well over a year.
- That is that ZIRP is destructive, not constructive.
- The "bubble" has been in policy.
U.S. Treasury Bonds, Gold And The Stock Market
- Our monthly "Continuum" chart anticipated a misstep for the "Great Rotation" crowd.
- Yields are now approaching support, and we are no longer bullish on T bonds.
- Beyond nominal bond considerations, the T bond market is key to in-depth macro analysis.
Gold, Silver And The Macro
- Gold's daily charts are bearish.
- Silver's daily charts are bearish.
- A potential bigger picture bottoming stance is still in play.
- Meanwhile, gold and silver bugs can use the relationship between the metals in macro analysis.
Stock Market: When Bad Is Good And Good Is Bad
- The US stock market may accelerate higher in the short term.
- The US stock market may take a hard correction in 2014 to test the big picture breakouts.
- The more bearish long-term scenario is #1 above.
Giving Bears Pause
- 2014 has been bearish for much of the market, outside of the Dow, S&P 500 and Transports.
- Various indicators beneath the surface (like the BKX-SPX ratio) are flashing bearish signals.
- Yet the state of the Semiconductor index and a mainstream media in bear mode are among the bullish caveats.
ZIRP Era In Pictures
- ZIRP is 5+ years in the running.
- ZIRP has severely punished savers.
- ZIRP has rewarded speculative asset owners.
Pigs No Longer Fly; What Are The Implications?
- Interest rates indicated to continue declining.
- Gold bottom would be indicated as confidence erodes.
- Economic deceleration would be indicated by a declining BKX-SPX ratio.
Commitments Of Traders: Gold, Silver, CRB And T-Notes
- Gold and Silver CoT shows room to move lower prior to a bottom.
- CRB CoT is bearish from a contrarian view.
- 2 year T Note CoT implies a coming rise in yield curves.
Gold Contrary Indicators
- Gold is relevant to monetary events.
- Inflammatory analysis such as the recent Ukraine hype should be tuned out.
- Gauging sentiment in gold is a reliable indicator to bull and bear phases.
Is The Yield Curve Really Flattening?
- The curve is flattening when measuring long-term yields to shorter term (2, 3 and 5 year).
- The curve is elevated along all durations when measured against the Fed Funds Rate (ZIRP).
- The system has an ongoing distortion built in by this dynamic.
Gold's Macro Fundamentals
- Tune out "China's demand drop".
- Tune out Ukraine style crisis hedge talk.
- Interest rate spreads are among the most important macro fundamentals for gold.
ZIRP Up Next?
- Zero Interest Rate Policy has been ongoing for 5+ years.
- S&P 500 is running alone this time with ZIRP pinning T Bill yields near zero.
- An inflationary or deflationary case can be made from this distortion.
- 3-D Printing: No Barrier To Future Losses For Investors
- Precious Metals Grind Out A New Trend
- Gold Mining Is Counter Cyclical